SEBI’s objective and functions – a legal perspective

Dharmishta Raval (ormerly an Executive Director at SEBI) has this superb paper on the topic. Securities Exchange Board of India or SEBI is a capital market regulator of India. One would usually assume papers on SEBI would be in area of finance etc. However, there some strong legal linkages as well and one is amazed how much it is a legal body as well and has been designed accordingly. Raval was instrumental in drafting the SEBI Act and is an authority on the subject.

She says India set up few regulators post 1991 reforms to regulate and develop markets independent of the government.

In India, there have been several regulators that have been set up, the more prominent of which have been SEBI (securities markets), TRAI (telecom) and CERC (energy). Of these, SEBI was among the rst, and has been seen to be one of the more effective in terms of delivering on a mandate that includes (a) protection of the investor, (b) prudential regulation of securities markets intermediaries and (c) development of the markets.

In order to implement the mandate, the legal foundations to create regulators must have broad enabling legislation. The legislation gives the regulator powers to issue regulations for the sector, and to supervise based on the regulation. But most importantly, the regulator must be empowered to conduct investigation of misdemeanours, adjudicate and have the authority to impose nes and other penalties if wrong-doing is established. Lastly, the credibility of the regulatory process of the regulator is enforced when there are in place appeals processes by courts that have specialised domain knowledge to review regulatory action (which, in the case of the SEBI and securities markets, is the Securities Appellate Tribunals or SAT).

This paper examines various aspects of the legal process at SEBI, starting with the separation of powers between Government and SEBI. To date, there has been little intervention by Parliament in the regulations implemented by SEBI. While legislation places much of the details of how regulation is operationalised within SEBIs powers, the government retains the powers to decide the organisational structure, with the powers to appoint the top management at SEBI. Aside of this, SEBI has the freedom to decide how regulation is to be operationalised, which uses the three mechanisms of regulations, circulars and guidelines.

She looks at this entire legal aspects of setting a regulator. What should be the objective? What should be the legal powers to achieve the objective? What should be the tools in functioning etc

The legal foundations for regulators involves broad enabling legislation. The legislation also gives powers to the regulator to issue subordinate legislation which are required to be tabled in Parliament after they have been issued. This makes it possible for detailed domain knowledge to be embedded in subordinate legislation, which could evolve rapidly. The regulator would then operationalise these regulations in its supervisory function. Regulators feature a unique combination of functions of writing law and administering it. Besides conducting investigations, regulators are also responsible for adjudicating and imposing nes and other penalties for misdemeanours.

There are three steps to establishing regulators:

Definition of mandate of the regulator

Creation of subordinate legislation

Enforcement of the regulatory mandate

SEBI Act 1992 establishes SEBI’s mandate:

1. Investor protection,2. Regulation of the securities market, and3. Promotion and development of the securities market

Unlike SEBI, both in US and UK there is no explicit mandate to develop securities markets.

She discusses SEBI Act 1992. It is broadly in two parts:

Role of Government – It appoints board members, SEBI accounts to be maintained by GoI, Functioning of SAT

The SEBI Act, 1992 gives SEBI power to draft regulations in order to regulate the market and discharge its functions and duties. While the objectives are provided in the SEBI Act, 1992, the implementation details are left to the regulator. The securities market is regulated more through regulations than through the SEBI Act, 1992.

This is in marked contrast to other statutes in India, which provides for the regulatory framework in the parent Act. For example, the Income-Tax Act is a complete self sucient code, and the income tax authorities are required to implement the Act as against notifyingthe regulatory framework. They are not expected to notify the regulatory framework and be policy decision-makers. The government notifies not only the Act but also the rules. Similarly, the Parliament notifies the Indian Companies Act, 1956, and the government noti es the rules thereunder.

In the case of SEBI, Parliament has delegated its powers of drafting the regulatory framework to SEBI. Besides the parent Act, SEBI also has powers under the provisions of the Securities Contract (Regulation) Act, 1956, (referred as the SCR Act) to notify the framework to regulate stock exchanges, and transactions on the stock exchanges, as well as the depositories under the provisions of the Depositories Act, 1996.

The paper moves on to discuss how SEBi frames regulations, circulars and guidelines. Circulars are meant to clarify regulations. For regulations, SEBI has a more transparent method.

Right from the start, in 1992, before notifying any regulation, SEBI has issued a public concept note or policy paper on the proposed regulations. For example, the SEBI (Insider Trading) Regulations of 1992, which were aimed at prohibiting insider trading, were preceded by a concept paper containing the objectives, rationale and provisions of the proposed regulation. This concept paper was posted on the SEBI web- site seeking comments and suggestions from the public. On receipt of the comments from the public, these were internally debated within SEBI. The revised draft regulations, along with comments received from the public, were then circulated for the consideration and approval of the SEBI Board.

SEBI also appoints committees to recommend the contents of regulations. The committees, which consist of experts as well as policy-makers, study the matter and present recommendations in a report. The report rst gets placed before the public for a period of time for comments. At the end of this period, SEBI takes a decision, and the regulations are amended. On the day SEBI Board approves the regulations, the decision of the SEBI Board is communicated to thepublic by means of a press release.

She goes on to discuss SEBI’s other functions of enforcement, inspection and penalties. Also reviews SAT appeals.

Overall it has been great going by SEBI. It has been very transparent in its operations and has evolved well overtime. She then recommends some changes right from its organisation to its functions.

I am not getting into all the recommendations. However, I would just like to add one. SEBI should have good economists (both finance and macro) as well. Taking a cue from SEC which has just appointed Craig M. Lewis as Chief Economist, SEBI could have such experts as well. It just helps connect many dots.